Infraco on its Annual Report 2011/12; Committee Report on oversight visit to Transnet

Meeting report

Mr Mandla Ngcobo, Chairperson of Broadband Infraco’s Board, introduced the presentation and gave an overview of what it would cover. He then handed over to Ms Puleng Sajanamane, Chief Executive Officer of Broadband Infraco, who presented the Annual Report.

Broadband Infraco’s legislative mandate was set out in the Broadband Infraco Act No. 33 of 2007. The main objectives were to expand the availability and affordability of access to electronic communications. This was including but not limited to under-developed and under-serviced areas; in support of projects of national interest; in accordance with the Electronic Communications Act and commensurate with international best practice and pricing; through the provision of electronic communications network services and electronic communication services.

Ms Sajamane described the status to date of the company with regard to its mandate objectives. The first was to expand the availability and affordability of access to electronic communications. BBI was licensed in 2009 and operated within the Right of Use (ROU) contracts. Prior to 8 January BBI had been operating under a right of use agreement, but since then they were free to have customers directly. They were also engaging directly with Eskom and Transnet, and had collaborated with Transnet freight and rail in planning their rollout. BBI had provided 12 675km of fibre, an increase from 6 000km in 2008.

BBI was mandated to connect under-developed and under-serviced areas. In order to do this BBI had established 17 Points of Presence (POPs) to service such areas. In terms of international best practice from a pricing point of view, BBI was obliged to provide prices lower than the market. The market had started off with just one operator providing fibre. This had since opened up and resulted in a price decline. Lastly, BBI was required to support projects of national interest. The company’s ability to do this was restrained, as an
Electronic Communications Network Service (ECNS) had not yet been issued. They had however enabled connectivity for Science Projects in the Northern Cape and reserved capacity on the West African Cable System (WACS).

Shareholder funds amounted to R1.825 million, and the company had also generated cash from operations of R262 million. R1.645 million had been used for capital investment. This included 12 675kms of fibre and 151 long distance sites. R444. 7 million had been invested to connect the government through the State Information Technology Agency (SITA). BBI had covered seven provinces, excluding Limpopo and Mpumalanga.

SADC integration had cost R36.7 million. This was incurred to enable regional integration of telecommunications services. A new route had been created in Swaziland which ran through Piet Retief and Mahamba. In Namibia a new route ran through Aries, Schuibsdrift and Onseepkans. A route connected Mozambique from Kamedien to Komatipoort on TFR fibre. Finally Zimbabwe was connected through Soekmekaar to Beitbridge. Botswana had not yet been connected.

R503.7 million had been spent to enable connectivity to the world. This was done in the east through an under-sea cable from Kwa-Zulu Natal called the Mntunzi Interconnect, and in the West through the WACS at Ysterfontein in the Western Cape and Carnavon in the Northern Cape.

R89.9 million had been spent on enabling quality services. A Network Operating Centre had been established, and the Telecommunications Network Management System (TNMS) had been upgraded, amounting to R15.2 million. Equipment for technicians to detect faults as directed by the operating centre was purchased for R15.5 million. A remote fibre test system, giving a pre-emptive analysis of the fibre status, cost R5.1 million and an environmental alarm system cost R5.8 million. Transmission equipment amounted to R16 million.

Ms Sejanamane concluded by saying this indicated that money had been spent across the nine provinces and this had been done in order to deliver on the mandate.

Operational Review
Ms Ramasela Magoele, BBI Chief Financial Officer, presented the operational review.

Projects had experienced challenges due to the breakdown of internal controls that had occurred in 2010/11. This had resulted in the Executive Authority taking over the business, which had caused time delays and under-expenditure. Roll out therefore had not gone as planned. However, measures were being implemented to ensure proper planning and execution in the future, and WACS had been implemented within budget and within the planned time lines.

Performance measures showed improvements. The availability of customer service in accordance with commercial contracts was much improved and was at 99.81%. Availability at the services level (protected) was 99.94%, which bettered the target of 99.5%. The time it took to restore core network faults was 4.73 hours, which bettered the target of 8 hours.

Progress had also been made with expansion: 55 Points of Presence (POPs) had been implemented in under-serviced areas; an additional 293km of fibre were deployed during the year under review; six Open Access Points of Presence were achieved; IP core switches were implemented in the Golden Triangle of Gauteng, Western Cape and Kwa-Zulu Natal to ensure that BBI could sell capacity smaller than 155mbps.

R85 million was spent on compensation to employees in 2012. This was an increase from R64 million in 2011 and R49 million in 2010. The staff complement at the end of the financial year was 168 of which 39% were female and it was the company’s drive to improve on this. 72% of senior management was black and 44% of the senior management were women.

The process of addressing and correcting the breakdown in internal controls that were observed in the 2010/11 resulted in a number of vacancies in key positions. For the first six months of the financial year, one permanent executive position out of the eight funded positions was filled. Most of these positions had been filled by the end of the financial year.

A total of R1.6 million had been spent on training in 2012, amounting to R9 500 per employee. This was a decrease from 2010 when R18 400 had been spent. This was due to more specific training being provided that was more relevant to the job.

Of the staff complement of 168, technical employees made up 53% of the staff. 52% of the technical team were under the age of 35. The company aimed to increase this, as it was an opportunity to develop skills for the country’s ICT requirements. Only 19% of the technical employees were women. This was a result of the job being seen as risky for women because of late-night call outs. The company had therefore introduced a policy of sending security guards to accompany female staff on night-time call-outs. 80% of the technical staff were black; 11% were white; 8% Indian; and 1% coloured.

Audited Financial Results
The financial overview showed that positive cash was generated from operating activities of R52 million during the year. Revenue growth of 32% included an IFRS adjustment of R92 million in the 2010/11 financial year, which resulted in a 1% real growth. A new Master Sale Agreement was concluded with Neotel five years after the expiry of the ROU. 73% of procurement was spent on BBBEE based on the Department of Trade and Industry framework.

There was an improvement from the previous year and effort had been made to improve internal control review processes: irregular expenditure was identified by management and reported; actions had been taken against employees in accordance with company policy and the Labour Relations Act; policies and procedures were reviewed and where required developed and employees were trained to ensure proper implementation.

Revenue growth stood at 32% when audited in March 2012. The gross profit margin was 30% and the net profit margin was 35%. Capital expenditure stood at R155.5 million; capital to revenue was at a ratio of 0.39; and cash balances were at R442.2 million.

Year-on-year revenue movement was due to:
▪ gaining new customers such as Vodacom, Seacom, BCX;
▪ a growing revenue base from existing customers;
▪ the price decline factored by the company as part of its mandate of bringing down the cost, as well as  market movement of broadband downwards and resulted in a R25 million reduction in revenue;
▪ R92 million increase represented the impact of accounting treatment on the agreement with customers.

Capital expenditure was an area where there were significant breakdowns in the internal control environment that resulted in irregular expenditure, as well as intervention by the Executive Authority exercising oversight, putting a hold on projects – that were not properly authorised – until corrective measures were implemented.

Total capital expenditure was R155 000 000 as of the March 2012 audit. This was significantly decreased from the audit of 2011 when total capital expenditure was R536 600 000. The lower expenditure was due to organisational realignment to address corporate governance issues which resulted in vacant positions and a delay in executing the capital programme. The vacancies arose as part of the drive to address corporate governance matters. Some employees were dismissed and others resigned. The decline in WACS was part of the planned project timelines and budget, as the project was due to be launched in May 2012. Total investment at the end of the financial year was R440.5 million. Expenditure for office equipment was in line with the company’s requirements, taking into account staff numbers and the life of the equipment.

The 16% movement year-on-year in terms of the statement of cash flows was due to: cash revenue growth from connecting the CSIR in the Northern Cape for a project of national importance; finance income was through investment of funds as per company policy; investment in WACS was part of acquiring the international connectivity that enabled, among others, SKA connectivity; finance cost movement was as a result of the movement of foreign currency incurred in 2010/11 on the WACS investment; and the national CAPEX of R71 million included national backhaul connectivity and office equipment. At year end, the company had sufficient cash to operate as a going concern. Measures were being implemented to continue improving the company’s liquidity position.

Irregular expenditure had been identified in 2010/11 and in 2011/12. R130 million had been incurred in 2010/11 and the matter was under investigation by the Accountant General’s office. In 2011/12 the initial process for procurement was followed but the contract value was exceeded (R3.9 million). Prior to 2011/12 correct processes were not followed for procurement, and this applied to contracts flowing into 2011/12 amounting to R69.5 million. Reviews and investigations were conducted to determine the impact of the financial loss. Processes had been implemented to avoid future irregularities, and training had been conducted for both the employees and the directors.

BBI’s spending with companies meeting the necessary level 1 to level 4 BBBEE contributor requirements amounted to 73% of the spend. Black women procurement spend was significantly low, especially on provision of professional services, installation of fibre and other related services. There was a focus on improving as part of the Company Customer Service Delivery Platform (CSDP) and company policies and procedures. BBI was moving towards regional procurement activities; the first procurement activity of this nature was done in the Northern Province for the survey and installation of fibre on the Eskom network.

Roadmap for the future
Ms Sejanamane explained that the new executive had had to consider what the purpose of the company was, where there were market efficiencies, and where the company was needed. It had engaged with the economic development units of the provinces to understand the requirements. BBI looked at infrastructure holistically, taking note of requirements for education, security, health, rural development.

Gauteng, Western Cape, Kwa-Zulu Natal and the Free State had immense commercial imperative, and this was where the private sector was rolling out. Within these provinces the company’s role was to fill in the gaps. The Eastern Cape, Mpumalanga and Limpopo were marked for case-based engagement. These provinces represented a great opportunity and would be pursued as a matter of first priority. The private sector had very low appetite for these provinces because of the lower economic activities. The roll out of broadband in these provinces needed to be driven by socio-economic benefit. The North West Province and Northern Cape did not represent a viable commercial business case. Shareholder or provincial funding would be required for them to be covered. With the low population densities as well as the low GDP, alternative technologies that require spectrum would have to be explored.

Discussion
Mr A Mokoena (ANC) welcomed the illustrative presentation. The parliamentary committee had been for an oversight visit and had not found the previous leadership very impressive but he saw a definite improvement. He asked about BBI’s regional roll out. He noted that POPs were the heart of Infraco, and asked if they installed POPs in other countries, did they help with servicing, and did this impact on sovereignty or privacy.

Ms Sejanamane responded that there were POPs both within South Africa and across the border. Agreements on who would deal with maintenance were worked out between BBI and the host country. BBI was also engaging directly with telecommunications providers of other governments to ensure that the connectivity was continuous.

Mr Mokoena also noted that the POPs appeared vulnerable. During oversight the Committee had found that they were contained in steel containers, he asked if this was enough for their security and protection.

Ms Sejanamane agreed that POPs were the heart of the network. It had been the strategy of the company to have containers, but they were now taking steps to make them more secure. They were focusing on nodal points first. The direct relationship with Transnet Freight and Rail was coming into play here, as their buildings were being used to house POPs, providing much better security. BBI was looking at how they could better secure those that were in containers in remote areas.

Mr C Gololo (ANC) thanked Infraco for the presentation. He asked for clarity on the mandate. The name of the company was short for infrastructure company, and as he understood it, the company had initially been established to roll out broadband infrastructure to under-serviced areas. The ECS licence allowed the company to roll out services as Telkom, MTN and Vodacom did. Was BBI supposed to provide the infrastructure or also provide the service?

Mr M Sonto (ANC) noted that the Department of Public Enterprises (DPE) was represented at the meeting, and asked them to explain why Infraco was not getting the ECS licence.

Mr P Groenewald (FF+) noted that the Department of Communications had specified that in order to qualify for an ECS licence the company should meet the criteria of an affordability test and an access test. As BBI met neither, the only option was a ministerial policy directive.

Ms Sejanamane responded that representatives of the Executive Authority would take up question, but it was in the Act that BBI should have the licence and DPE was pursuing the issue. A ministerial directive would be required.

Mr Gololo asked what the current status of the relationship with NEOTEL was.

Ms Magoele responded that the right of use agreement with Neotel had ended in January 2012, and since then the relationship was purely that of customer and supplier.

Mr Sonto asked what rating the company would give itself compared to the continent and the world.

Ms Sejanamane responded that she would give the country 5 out of 10. She explained that SADC had the most expensive broadband in the world. The East African community was much more advanced than SADC because they had worked on connectivity regionally. The West coast had faced challenges but was also working together as a region. North Africa was fully connected. Outside of Africa, North America also had uncovered rural areas, which government was addressing. Europe was sufficiently covered. China had challenges in rural areas, but the government had a comprehensive plan. The government was also initiating a roll-out in rural areas in India.

Ms Meta Maponya, Chairperson of Audit and Risk, added that in the rest of the world, the government was driving the broadband spread. In South Africa so much more had been spent but the penetration was so much lower than the rest of the world. Government had made it a private sector issue, and that meant that areas where it was not profitable were not covered.

Mr Sonto asked if that was an argument for semi-nationalisation.

Ms Maponya responded that it was not nationalisation but government provision of services. As with infrastructure, the government had to intervene to provide in areas where there were only social returns rather than profit to be made.

Ms Sejanamane added that countries that were advanced with regard to broadband were countries where the government has invested. BBI’s role in this was to ensure that those provinces that had been neglected would receive broadband, but they needed the funding to ensure that they could do this.

Mr Sonto was glad to hear that talent development was focused on the youth, but asked what would the company do about old talent that was already employed. Was there an attraction and retention strategy? All entities attracted scarce skills but found it very difficult to retain them. Poaching was a recurrent problem, particularly in the area of engineering.

Ms Sejanamane agreed that older staff were important because engineers rely on experience. BBI wanted to achieve a mix of ages, so that older staff could guide the younger engineers. This was important for the stability of the company. They had initiated internship programmes and intended to optimise their programmes in partnership with Transnet. BBI had introduced a retention contract for those that underwent expensive training.

Mr Sonto asked about the progress that had been made in investigating some of the irregular tender cases. The CEO had said that the matter was with the police. However, the report had said that the police were not coming forward with critical information. Who was delaying this case? Was it the police and if so, what could be done about it?

Ms N Michael (DA) congratulated the success of the West African cable launch, but felt that this was not promoted enough, and urged BBI to better promote their successes. She was also impressed that BBI was one of the few state owned entities that adhered to a moratorium on remuneration for their executive committee and applauded that.

Ms Sejanamane responded that BBI took note of the advice and was working on building its reputation.

Ms Michael reported that an ICT journal had published an article on the massive turnover of staff at BBI. She had read that the company responded by saying it was a normal occurrence; nonetheless, the turnover was particularly high. What caused this and what could be done to prevent it?

Ms Sejanamane responded that BBI had had people leaving the company, and in exit interviews people indicated that they received better remuneration in other companies. This was difficult to address as the company was a public entity, but they were looking at a comprehensive talent strategy that included retention plans.

Ms Michael noted that the mandate was given to BBI to pay attention to trends and development, especially with regard to digital terrestrial television. Had progress been made in this regard?

Ms Magoele responded that there had been a request from the Department of Communications to engage directly, and BBI would take that matter forward.

Mr Dikobo (AZAPO) found the report encouraging and was confident that the company was in good hands. If demand was outstripping supply, he asked why prices were dropping.

Ms Sejanamane responded that this case did not follow the usual rules of economics because there were still gaps in the national backhaul, which meant the prices to the end user were not dropping. Another example of this was the mobile termination rates which had been regulated and brought down, but retail rates had not followed suit because of the high use of data.

Mr Dikobo asked if the private sector was focusing on Gauteng, Western Cape and Kwa-Zulu Natal why Infraco was operating there.

Mr Dikobo asked how BBI could ensure that fibre did not travel through villages and small towns without those towns benefiting.

Mr Groenewald said that when the Committee met the team from Infraco a year ago it was under very different circumstances, and congratulated the team on the huge improvement. The previous acting chief executive officer had also played a major role in the turn-around and a word of gratitude was due to him. The report said that 21 out of 27 targets had been met. It had explained why certain targets had not been met, but he asked what was being done to prevent this happening again in the current year.

Mr E Marais (DA) suggested that Saldanha Bay would need increased support in the future, as the Minister of Trade and Industry had designated it an industrial development zone.

Ms Sejanamane responded that plans were informed by where there was major development in a province. Saldanha Bay would therefore be incorporated.

Ms G Borman (ANC) asked if BBI had been unrealistic when setting the six targets which were not reached.

Ms Borman said that it had happened before that a public entity had created high expectations but soon fallen back into internal control problems. How sure was the company that this would not happen?

Mr Ngcobo said that he doubted that this would occur in the upcoming years as great progress had been made. Structurally safeguards had been put in place in the board and the company so that processes were in place. Auditors were rotated to avoid complacency, and a remarkably strong relationship had been forged with the Auditor General’s office. Staff had also been made very aware of best practice and the regulations. He was therefore able to say that they doubted it would happen under the current board.

Ms Maponya added that a lot of policies had been reworked, and staff had gone through training to know their responsibilities and the laws that regulate them. Regular risk workshops were run and plans had taken into account the majority of the risks identified.

Ms Borman asked how culprits were being dealt with.

Ms Sejanamane responded that they were confident as the new executive that the measures and controls would mean that the company retained staff with the right integrity and attitude. They were ensuring that cases were being opened with the police service to ensure that the cases were properly investigated, and that the process would take its course if there was merit to the cases.

Mr Sonto asked what disciplinary measures were taken over and above the cases that were in process.

Ms Magoele responded that measures had been taken to comply with HR company policy, and internal disciplinary hearings were held. Depending on the severity of the cases, culprits were either given a warning or dismissed.

Mr Mokoena asked if Infraco had a patent, as they were running a risk of staff taking crucial information when they left.

Ms Magoele responded that employees were required to sign contracts to prevent this. They had tried to safeguard against this when people left the company but could not be 100% effective.

Ms Magoele responded that whether targets were realistic or not, the leadership had been through a learning curve and had come to understand the business and the mandate better. They had also entrenched the understanding of the mandate amongst the staff. Targets were now aligned to what they were supposed to deliver. National Treasury was coming again to help define these targets.

Committee Report on oversight visit to Transnet, dated 20 November 2012
Mr Groenewald made the point that the Committee had asked for quarterly reports from a number of institutions. This meant that the onus was on the Committee to follow up if there no report was submitted. There should also be time for this to be discussed on the agenda. Feedback would have to be returned to the institutions. If this was not done the reports would not be taken seriously and it would become a futile exercise. He asked that the Committee undertake to do this.

Mr Groenewald asked if the Committee should task the Minister to follow up on Committee recommendations or if it should be the Director-General, as the accounting officer, that should ensure that recommendations were followed up.

Ms September responded that the Committee’s relationship with the Department was via the Minister and it was his decision to delegate it as he saw fit. She added that the Saldanha project was a multi-ministerial project. The recommendations should reflect that. The Report should reflect that the Port Manager was absent when the Portfolio Committee visited.

The Committee Report was adopted with these changes.